Today I thought I would look at the case for interest-rate cuts in the UK as presented by the Bank of England. There should be no surprise that Swati Dhingra is in the van of this and here she is from the weekend in the Evening Standard. Actually the Evening Standard is a curious thing in itself since it stopped being a daily evening newspaper. But here are her thoughts.
A Bank of England policymaker has dismissed suggestions that inflation is a problem unique to Britain, as she called for more interest rate cuts.
Swati Dhingra, a member of the Bank’s Monetary Policy Committee (MPC), argued there was no need to be “overly cautious” about lowering borrowing costs.
Rather curiously she then chose to point out there are particularly UK issues with inflation.
Writing in The Times, Ms Dhingra said: “It’s become commonplace to assert that inflation in the UK is out of step with other economies, requiring a more careful approach to cutting interest rates as a result.
“With prices for services and food rising more quickly than in the major eurozone countries, inflation looks like a particularly British problem.”
As you can see her case that it is not a UK problem is contradicted by her own pointing out there is an issue in services and food. Those with any sort of memory will recall that the Bank of England in particular and central bankers generally were previously making a case for interest-rate rises based on services inflation via their Core inflation claims. Now in a contradiction we can apparently ignore it.
If anything things got worse for her because how can you possibly claim global events are a specifically British thing?
“But it’s not clear that this gap reflects anything other than global trends and slightly different supply chains and shopping baskets in the two economies,” she wrote.
“The difference in inflation between the UK and our continental neighbours can be largely explained by administered prices and global commodity shocks.”
There is an issue around administered prices but how does she expect that to improve? Because if we switch to looking at the November Budget an under pressure Chancellor may be even more likely to raise inflation in the same manner Rachel Reeves did last year.
“These should pass.”
That sounds a bit like Gandalf in Moria and that did not go well. Also this really is the equivalent of being tone deaf after the phase when central bankers assured everyone that there technocratic expertise meant that they were certain inflation would be “transitory”. Before panicking after being proven wrong and then raising UK interest-rates to 5.25% sadly mostly after the horse had bolted.
Also there is the issue that the Labour conference has headed in this direction.
Ministers have hinted that the benefit cap, which was introduced by the previous Conservative government, could be lifted in November’s Budget.
The Resolution Foundation think tank says axing the policy would cost £3.5bn a year.
But the think tank, which until last year was run by Torsten Bell, who is now Reeves’ top adviser at the Treasury, has also argued for axing the cap., external.
( BBC)
So we could easily see tax rises on top of the ones that are already needed because of the state of the UK public finances. I would say the fiscal rules of the Chancellor except that sooner or later she will break them.
There does not seem to be much good news from electricity orices either.
International Electricity price comparisons are out today and it’s not good news for the UK. The UK keeps the #1 spot for Industrial prices, and goes from 4th to 2nd for Domestic prices. (@LoftusSteve)
Her obvious bias is shown by the statement below because there is no real clear case that lower interest-rates provided more economic growth as we seem to have ground along without much of it under both scenarios.
“We can afford to cut rates further and not put additional strain on economic growth without threatening the inflation target.”
Deputy Governor Sarah Breeden
The speech from Sarah Breeden yesterday is significant because she is not only one of the five internal members but is new and will therefore be keen to support a Governor who gave her such a large promotion and pay rise.
But the road has not been smooth. Having fallen back to our 2% target last year, headline inflation has risen again, back up to 3.8% in the latest data for August. And we think it will have increased again to around 4% for September.
This is too high.
She skipped the part where the Bank of England had previously told us it would now be on target, But even so you might expect some contrition. But no. What we actually got was a repetition of the most foolhardy treatment of rising inflation from ECB President Lagarde.
Specifically, does this latest “hump” in inflation represent a mere “bump” in the road? Or is it a sign that the disinflationary process is veering off track – that inflation is proving sticky not bumpy, meaning our hump is in fact a plateau?
If there was a central banking memo saying whatever you do make sure that you never associate the word “hump” with inflation again due to its awful track record Sarah Breeden either did not get it or did not bother to read it. She is also apparently not bright enough to have figured that out for herself.
Also she is hoping that people do not recall the Monetary Policy Report of last November which told us this.
We expect inflation to rise slightly again over the next year, to around 2¾%. Inflation is expected to fall back to the 2% target after that.
As you can see she has chosen her dates carefully to avoid this.
This “hump” has not been a surprise. Indeed, the MPC had been forecasting a pick-up in inflation over 2025 since the time of the February MPR, with inflation then expected to rise to 3.5% in June and to peak at around 3.7% in Q3.
This really matters because from last November to now we are starting to head into the zone of when policy impacts the economy. As you can see they were wrong again about inflation which is already a critique of the views of Swati Dhingra above.
Apparently though the inflation is nothing to do us.
This news too has largely reflected external factors
When Euro area inflation is 2.2% compared to our expected number around 4% for the same time period this really rather begs the question of how these external factors have affected us but not them? If unlike her we try to be balanced we might argue that without the extra strength of the Euro their inflation might be 2.5% which still leaves a very large gap.
In fact she seems determined to mislead.
The rise in UK food price inflation, which reached 5.1% in August, reflects in large part a sharp increase in some agricultural commodity prices and so provides little signal on domestic inflationary pressures.
How do commodity prices only affect the UK? When one considers that the UK Pound £ has been pretty strong just not as strong as the Euro it veers towards insulting the audience. Anyway perhaps she could at some point in the future give us an example of how the events below only affect the UK?
Indeed, over the past year droughts in major coffee-producing regions like Brazil and heavier than usual rainfall and plant diseases in some cocoa producing regions in Africa have pushed up on prices.
Perhaps she is simply pushing her climate agenda.
Also she inadvertently confirms that the Bank of England was much too late in raising interest-rates.
As set out in the August MPR, several of these bottom-up indicators suggest the impact of past increases in Bank Rate on the level of GDP is now around its peak.
Then we get a clear denial of what has happened to inflation over the past year or so.
I do not see evidence that the disinflation process is veering off-track. Instead it remains my central case that the “hump” will prove just a bump in the road.
People struggling to pay for higher food prices may be wondering how you can claim this?
In such a world it may be tempting to wait to see the “whites of disinflation’s eyes” before looking to reduce the restrictiveness of policy further. But managing the upside risks to inflation in this way brings risk in the other direction: holding policy too tight for too long comes with costs to output and employment, which could then pull inflation below target .
Or as Hall and Oates put it.
You’re out of touchI’m out of time (time)But I’m out of my head when you’re not aroundYou’re out of touchI’m out of time (time)But I’m out of my head when you’re not aroundOh, oh-oh-oh, oh-oh-oh.
It really is extraordinary and indeed unworldly stuff as she claims inflation which she expects to be double its target means this.
Moreover, I have not seen any evidence yet to suggest that the underlying disinflationary process from past shocks is veering off-track.
Comment
I have looked at things in this way today because it shows that Governor Andrew Bailey can cut interest-rates whenever he wants. This is because there are supposed to be 4 external members to balance the group think of the Bank of England itself. But Swati Dhingra was clearly chosen because she was known to be keen for lower interest-rates. This devalues the whole point of an external member which is now a failed experiment.With Professor Alan Taylor we have two external members of the sort who were described in Yes Prime Minister as “people who do not need influencing”.
With the majority of the internal members keen to garner favour from the Governor and in the case of Sarah Breeden to insult her audience as she did yesterday. He can cut interest-rates pretty much when he wants to and continue his awful record on inflation.
